This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

June 28, 2012

Student Loan Rate Hike Averted in Highway Bill Compromise

Compromise also includes adjustments to defined benefit funding requirements

The student loan rate may be frozen at 3.4% under the bill, but students no longer get six interest-free months after graduation.

A bipartisan agreement was reached late Wednesday on a federal highway bill that includes provisions to prevent student loan rates from doubling as well as makes adjustments to defined benefit funding requirements.

The bill, the Surface Transportation Extension Act of 2012 (H.R. 4348), is headed for a vote in the House Rules Committee today and floor action is likely later in the day.

Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, said the two-year bill “will make critical infrastructure investments across the country and support or create more than a million jobs.” The agreement, he said, “will also make a high-quality education affordable for millions of students across the country. We needed to reach across the aisle to get this done, and that’s exactly what we did.”

The final package funding the highway bill and the student loan rate provision, which is fully paid for, will cost $27.185 billion, Baucus said.

Joe Lieber with Washington Analysis says that under the language currently being proposed in the highway bill, companies would be able to use the 25-year corporate bond average when determining the discount rate used to fund defined benefit plans. Under current law, he says, companies use the last two-year corporate bond average when determining their discount rate. Consequently, he says, companies’ discount rates will rise, meaning smaller pension contributions and higher net income.

The defined benefit provision, Lieber says, is being used to offset the cost of freezing the current student loan rate loan rate at 3.4%. “The provision has bipartisan support and raises $9.5 billion over ten years, which will help defray some of the cost of the highway or student loan bill.”

However, The Washington Post points to some pretty unfavorable student loan changes that have received little attention as lawmakers instead focus on preventing a spike in interest rates on federal student loans.

The Post says that starting Sunday, graduate students “will become responsible for paying the interest on their federal loans while they are in school and immediately after they graduate. That means they’ll have to pay an extra $18 billion out of pocket over the next decade.”

Meanwhile, the Post goes on to say that “government will no longer cover the interest on undergraduate loans during the six months after students finish school. That’s expected to cost them more than $2 billion.”